Atkore Inc (ATKR) 2019 Q1 法說會逐字稿

Greetings, and welcome to the Atkore International First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Keith Whisenand, Vice President of Investor Relations. Thank you, Mr. Whisenand. You may begin.

Thank you, and good morning, everyone. With me today are Bill Waltz, President and CEO; as well as David Johnson, Chief Financial Officer.

I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or future financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our 10-Q and today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

With that, I'll turn it over to Bill.

Thanks, Keith, and good morning, everyone. It feels like we just had our end of year 2018 earnings call since it was just over 60 days ago. So I'll be brief and let David hit some of the financial details you want to hear about.

Looking at our results on Slide 3 and 4. Largely, the quarter ended as we expected, and our strategy continues to deliver impressive improvements. We delivered net sales of $452 million, adjusted EBITDA of $70 million and adjusted net income per share of $0.74. These results are up 9%, 20% and 32% versus last year.

Looking at the highlights for the quarter. We delivered organic net sales growth of 7%. We did see volume strengthen in key categories like PVC conduit and specialty cable, where we get above-average margin, but overall volume was lighter than our expectations. This is primarily due to the year-over-year difference from many of our distributors push for a year ago to achieve calendar year-end rebates.

If you recall, we're lapping a difficult comparison as that annual rebate-driven buying drove 9% Raceway volume growth in Q1 of fiscal 2018. And once again, this has no impact on our view of the market for the full year, and we are still expecting 2% to 4% volume increases for -- from the construction markets.

I'm proud to report our pricing initiatives in our MP&S segment caught up with the cost curve in the quarter. Overall, the pricing environment was stronger than we guided in November, and we do not expect to see price versus cost to be a net headwind this year.

I mentioned adjusted net income per share was up an impressive 32%. It's important to understand that this growth was despite a $5 million earnings headwind driven by last year's deferred tax revaluation.

Finally, we repurchased 1.2 million shares on the open market, taking advantage of the market volatility over the last quarter and fully utilizing the balance of the $75 million repurchase plan our board approved in August of 2017.

In summary, Q1 was another strong quarter, and we continue to see a strong 2019 ahead of us. As I mentioned in the past, it's the team, the culture and the Atkore business system that, together, continue to provide the discipline to deliver on our commitments to our customers as well as our shareholders.

With that, I'll turn the call over to David who will walk us through our financials in more detail and provide additional insights into the quarter.

Thanks, Bill, and good morning to everyone.

Moving to our consolidated first quarter results on Slide 3. Net sales were $452 million, up 7% organically after normalizing for net acquisitions and foreign exchange. In the quarter, this increase was driven by higher average selling prices as well as focused effort on driving a favorable mix.

Net volume, excluding net acquisitions, was down 3%, reflecting the year-over-year distributor rebate impact that Bill mentioned in our Electrical Raceway segment and flat volume for MP&S. To total Atkore, the net acquisition impact added 2% to the top line in the quarter.

During the quarter, we incurred input cost increases of $27 million year-over-year. Through initiatives, we successively increased our average selling prices $40 million, resulting in a net $13 million favorable EBITDA impact. We've broken out those items on the adjusted EBITDA bridge on Slide 3.

As we have previously mentioned, we passed these costs through to our customers in price. Net sales and cost of goods sold increased in equal amounts, unfavorably impacting the resulting margin percentages. On a constant input cost basis, our adjusted EBITDA percent would have been up 235 basis points versus Q1 2018.

Gross profit was $110 million for the first quarter, up 14% or $13 million compared to the same period in 2018, driven primarily by price and mix versus cost. Adjusted EBITDA was $70 million, up $12 million or 20% versus last year. Our net acquisitions account for $1 million of the increase to adjusted EBITDA in the quarter. These increases were partially offset by volume, inflation, variable compensation and growth investments we've made in the business.

Our net income on a GAAP basis was $27 million, down slightly versus the first quarter 2018. As Bill mentioned, the deferred tax accounting for the Federal tax reform favorably impacted net income last year by $4.8 million. In addition, our interest expense is $5.6 million unfavorable mainly due to our Q2 FY '18 stock repurchase from CD&R.

Adjusted EPS was $0.74, up 32% from the first quarter 2018.

Moving to our Electrical Raceway segment on Slide 5. Net sales increased by $27 million or 8.5% to $343 million. Our recent acquisitions, all of which are reported in Electrical Raceway, increased segment net sales in the quarter by $13 million or 4%. Organic volumes were down approximately $11 million or 3% in the quarter driven by the year-over-year differences in distributors managing year-end rebates.

Higher average selling prices had a favorable impact to revenue of about $25 million or 8%.

Adjusted EBITDA was $69 million, up $12 million or 22% compared to last year. The acquisitions account for $2 million of the adjusted EBITDA increase. Adjusted EBITDA margin increased by 220 basis points with price execution, accretive acquisition margins and favorable mix driving the improvement.

Moving on to our Mechanical Products & Solutions segment on Slide 6. Net sales in the quarter were up $10 million or 10% to $109 million. Volumes were flat. Prices increased added 15%. And the divestiture of the flexible sprinkler business reduced net sales by 5%.

Adjusted EBITDA of $11 million was flat compared to last year. However, normalized for the divestiture, MP&S adjusted EBITDA grew by 10%. Adjusted EBITDA margin is below the first quarter 2018 by 100 basis points. The mix impact from the Flexhead divestiture accounts for 50 basis points of the reduction. And although our pricing initiatives have caught up to the steel cost curve, the margin percentages are negatively impacted by passing through the significant steel increases.

Turning to our balance sheet and cash flows on Slide 7. The balance of cash and cash equivalents at the end of the quarter was $76 million. Net cash flow from operating activities for the quarter was $40 million.

Finally, our net debt of $829 million and leverage ratio, which we define as net debt to trailing 12 months adjusted EBITDA, was 2.9x. As we've communicated in the past, our long-term goal is to move this metric back to the low 2x range.

Now I'll turn the call to Bill for our guidance update.

Thanks, David. Moving to our 2019 guidance on Slide 8. Our view on the construction market has not changed for this year, and we still expect Electrical Raceway to be up 2% to 4% in 2019. And although we expect strong industrial markets, we are seeing projects move forward slower than we originally anticipated, and we are lightening our view on MP&S volumes. We now expect MP&S volumes to be up 2% to 4%.

Even with that adjustment to volume, Atkore's proven pricing and mix discipline is allowing us to raise the full year guidance for both segments and overall Atkore. Our 2019 guidance is as follows: for Electrical Raceway segment, we expect adjusted EBITDA range to be between $270 million and $290 million. For our MP&S segment, we expect adjusted EBITDA to be between $55 million and $60 million. For total Atkore, we expect 2019 adjusted EBITDA to be between $290 million and $310 million. We estimate our adjusted EPS to be between $3.05 and $3.35.

Interest expense will be approximately $52 million. And after our latest repurchases, our fully diluted share count will be 48 million shares. Our tax rate will be about 25% for the full year. CapEx is expected to be between $35 million and $40 million.

Turning to the second quarter guidance for total Atkore. Our adjusted EBITDA range is between $69 million and $75 million, and our adjusted EPS range is between $0.70 and $0.80. And so after a strong Q1, we are set up for another quarter of double-digit growth in both metrics at our midpoint.

On a sidenote, I also wanted to inform you of 2 recent resolutions that just came into effect. The first is the approval by our Board of Directors for a new $50 million share repurchase plan. Secondly, shareholders voting from our annual meeting resulted in approvals that declassify the Board of Directors for annual elections by the 2022 annual meeting, eliminate supermajority voting requirements and replace plurality voting with majority voting in uncontested elections of the directors. These improvements in our governance processes makes us more shareholder-friendly and are a continuation of Atkore's evolution as a public company without private equity ownership.

We are pleased with these results, which we feel demonstrate the confidence from our shareholders and the Board of Directors and management and our overall strategic direction at Atkore. And lastly, that confidence is an extension of our own team's focus to ensure we deliver upon the commitments we set forth and enable us to raise our full year guidance.

With that, operator, please open the call to questions.

(Operator Instructions) Our first question comes from the line of Andrew Kaplowitz with Citi.

So can you give us more color regarding how to think about the peak tailwind of price versus cost within your 2 segments? If we look at steel, for instance, it's continued to drop, as you guys know, since the spring of last year. But we know there's a lag between pricing and inflation or deflation, particularly in MP&S. I think, though, you just said that you caught up early even in MP&S in terms of price versus cost. Now you wouldn't have a headwind now in terms of versus cost. But given the lag in how deflation can affect the P&L, could you actually have a positive benefit now versus the $5 million to $10 million headwind that you've previously guided to last quarter for the year?

Yes. So Andy, I will start to address. Either follow up or David. We -- as we go into the year, as the last several years, we've done a really good job with pricing. I think last year, just to give a perspective, we did such a great job as we set our guidance, that with a couple of onetime things like PVC, hurricanes and things, we just were not sure to go can we lap year-over-year. But as we get into the year, as you noted with MP&S doing a really good job, I think our Electrical Raceway has always done a good job. That instead of seeing it from a comp perspective year-over-year, that we do expect to now have it as a net 0 basically. And again, I think we've proven whether commodities go up or down, there can always be a lag. But we've been a very effective -- tariffs, no tariffs, commodities up or down, steel, copper, PVC continuing over time to increase our spreads and, therefore, our EBITDA.

Okay. And maybe if I could shift gears and ask you about the Electrical Raceway volume, obviously, down 3%, maybe slightly below expectations, but you're still guiding at 2% to 4%. Is there anything that you're seeing as we are here in Q2 that gives you the confidence to sort of get back into the range? I know you said you faced difficult compare versus the rebates last year. But as you guys know, it's been sort of a little weakish on the volume side for the last few quarters. So how do we get confidence that you're sort of going to get out of the muck there?

Yes. It's a great question, Andy. And yes, every -- first, for the markets and then Atkore. Every indication are that 2% to 4% architectural building index, around 54% the last I saw, Dodge would tell us that same 2% to 4%. I think every public corporation that's guided has guided in that range, give or take. They may put revenue in. And remember, we separate our volume from price. So our number could be a little bit lower and still be better when we put, for example, this quarter and price. And then, you addressed in our public information is we did have a tough comp last year. So with 9% up where distributors bought ahead, we didn't see it this last quarter for a couple of reasons. One, they had already hit a lot of their goals; two, as you addressed in your first question, commodities are dropping in price. So where a distributor and/or a contractor can manage their inventory down, whether it's steel dropping 10%, 15%; copper, down 10% year-over-year, they have, and that's because what's pushed our volume. But it gives us a reasonable strength as we get into the beginning of this year that we are seeing the volumes rebound. And we feel comfortable with our guidance of 2% to 4% up for fiscal 2019 because of that.

Bill, last quarter, you talked about slight market share decline, either kind of keeping up or maybe slight decline in Electrical Raceway. Is that still what's going on when I look at that negative 3%? Is it -- maybe you're higher priced or no?

No, I don't -- I think that's a great question. And I think even there, to put -- continue to crystallize the information. As I had mentioned in the past, there may be some slight market share. But again, we're talking basis points here. The other thing is we've articulated in the past, and we continue to do really well is the mix. So there are products I called out. I'm hesitant [with us] thinking competitors are listening to the call, but we did list out things like specialty cable and some of our PVC products where we specifically targeted products with higher margin. And we actually grew share in those. And I could mention other products, or I'm aware of others, where some of the very basic products. I'm willing to give up share in something below our average margin to pick up. So it's kind of, Andy, that net balance, but I think the team has very specific plans. They have it targeted by account with value props. They're going after it. I fly from here tonight to meet with all of our agents at a national convention. And I'm sure that will be a very specific part of our conference discussions, how we continue on the strategy, it's working really well.

And one thing I will just add on that mix, Andy. If you look our EBITDA bridge, you'll see that the volume mix EBITDA impact is only $1 million. And actually, that rounded to $1 million. It was only about $600,000, $700,000 on $11 million in volume. And again, that just shows the mix impact of -- we did have higher volumes of more possible products in some of our product lines and a little bit less volume, I would say, and are less profitable, and that mix effect really put the EBITDA impact as a pretty minor impact on the $11 million.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

This is Jeff Reive, on for Deane. Now that your net leverage is around 3x. I know some investors are growing concerned about peak cycle. So given the newly issued buyback authorization, how do you view buybacks versus debt paydown in this environment?

Yes. So in this environment, I believe, like we said before, it's a balance of tuck-in M&A. We do want to make sure that our buybacks offset dilution, which we've already done for this year. And then the rest will be, I would say, leveraged towards debt reduction. I think when we look at where we are in the cycle and what have you, we have talked about allocating a little bit more to debt reduction. We know it's public. If you look at our financials there, we can have a debt repayment that we have to make in Q2 of $24 million, mainly because we had excess cash at the end of last year. So you will see us paying that down in Q2. Q2 typically is not our highest cash flow month, but we do feel like we're still going to have pretty strong cash flow in Q2, especially versus Q2 of last year. And then second half is when we really have our opportunities to, again, allocate that capital. I would say -- I'd like to say more to debt reduction, but I would also say that our M&A opportunities are still pretty robust. The pricing is still reasonable from where we've seen it in the past. And we will still take advantage of small tuck-in acquisitions where we feel it's the best thing to do for the business long term.

Okay. Great. And then would it still be a good framework to think about $100 million, $150 million on M&A deployment annually?

That's a broad range, Andy. But I think, over to your question and David's answer, shorter term, that may be more at the top end of this because of -- hey, I'll just add color. Internal CapEx where we can get a 2-year return, top priority, and that's in the guidance, that $30 million, $40 million -- we have a more specific number but it gives you a feel. From there, as David said, I think we're going to shift a little bit more to get that debt ratio down with using cash and then continue to do tuck-ins. But where the team is really focused now, and specifically people use different words, but tuck-ins, that $20 million, $25 million type of company is just so synergistic. That fits in with our lines, fits exactly with through the same agents going through the same distributors with high growth potential, specifiable products. That's the type of things where our team does an amazing job at the pipeline, but we are being very specific because we do have the opportunity to continue to delever well. And we're going to take advantage of that with the cash we're generating.

(Operator Instructions) Our next question comes from the line of Peter Lennox-King with UBS.

So if we could start maybe with seasonality, it looks like you've got some seasonality shifts within the segments on the EBITDA line relative to last year. So in MP&S, it looks like this year, EBITDA will be about 43% H1 versus H2 being balanced while last year, it was much more front loaded, about 50%, 54%, 55%. So a good deal lower. And I'm just wondering about the underlying dynamics there. Is it a price cost effect? Or are you simply more optimistic about MP&S in the second half?

Yes. I think there's a couple of things. But one of the things driving, as you look at the numbers, is also just the commodity prices. So as commodity prices go down, that's driving a little bit of the numbers. From there, I don't know from the team. There's nothing major we're seeing at this stage.

Okay. Okay. And then it's interesting because the effect is the shift is not as pronounced, but it's the reverse in Raceway where you have a little bit more front loaded than you were last year. So again, that might be a commodity effect...

And the pricing environment.

Yes. I think -- yes, it's the pricing. Let's put it this way. In our -- some of our products, PVC, for example, just one subsegment, obviously, there's seasonality there. But I don't think it [gets lifted] for our guidance. There is no hockey stick or anything else versus just, hey, how is the team's bottom up, look at things. And then from there, it's been the ways of the pricing, what's commodity so on and different things and mixing like that. So some timing of projects being shifted out, but nothing. I just hate to say it, Peter, but nothing really to read into other than I think we've given accurate guidance.

Okay, great, great. And maybe staying on MP&S for a moment. You cited slower industrial -- a slower pace of industrial development project behind the volume guide decrease for this segment. What do you think is driving the slower pace that you're seeing there? Is it just caution from your customers? Or are there [any verticals] you'd call out?

Oh, yes. Great question, just because of clarifying. No, it's been more projects being pushed out. And trust me, if you think about the logical question when the project gets pushed out, like, well, great, raise your second half then. And then you get into going, just you realize, labor shortages and when the project gets pushed out, will they always be behind? So we are being prudent but I think accurate in our numbers just to go, "hey, if some of these projects that they thought will get done on 6 months, are taking 9 months, what's that mean?" So just as things continue to shift. But the activity out there, again, across all facets right now is pretty strong, so just timing.

Okay. Okay. And then one last one, if I could. I'm sure this is a topic that -- where you said is the -- maybe you're tired of hearing about it or thinking about it, but the weather. I imagine you're happy to be through the polar vortex there. As we roll through -- Q2 for you, is there any notable impact or lasting impact that you'd call out? I know you've got a number of production and distribution facilities throughout the Midwest and Upper Midwest. And I'm wondering if there's anything that whether you [had a close in] production or anything on that perspective?

No, nothing. Yes, I guess, later, I can tell you about my airplane stories. But no, for all sincerity, Peter, no. Did we shut down a facility for a day because of an ice issue or polar vortex, but that was only a partial. And there's always weather. There's always holidays and Chinese New Year. And they're built into our comps, and we're pretty convinced that we'll deliver on our forecast.

Our next question comes from the line of Rich Kwas with Wells Fargo.

This is Deepa Raghavan for Rich Kwas. Bill, so few for me, too. I'll start with the guidance spread. I mean, $0.30 spread, I mean, you already have, I mean, on the EPS line, and you're already pretty much halfway through it. I mean, you guided to Q2, although I see that you're trying to keep your $0.10 spread per quarter. But if I look back last year this time, I mean, you're probably guiding to a $0.10, granted it was a different CEO, Jim, I know he guided with a $0.10 spread, [higher spread]. But is there any -- or is it just a function of your comfort with a wider spread? Or is it -- are there more puts and takes this year versus last year and that's why you're keeping this wide spread? And if there are puts and takes, what are some of those that are tied to the low end of your EPS guide or to the high end of your EPS guide?

Yes, Deepa. I don't think there's anything that's unusual to keep the spread kind of where it is. When we look at our adjusted EBITDA, which then translates, of course, into our adjusted EPS, a $69 million to $75 million range, $6 million on the size business we have, given all the dynamics that you can imagine you deal with, we just feel it's prudent to have that kind of a range to make sure, again, that we're guiding prudently and make sure we are within the range for guidance when the quarter ends, so.

Oh, okay. So there's just -- so nothing, all right. So let me ask...

Yes, $6 million, obviously, is not that much of a -- it's fairly tight range, so.

Yes, that I agree. So looks like it's a little bit more below the line, but okay. So last quarter, when you gave initial guides last quarter, you've given us your vertical outlook. You gave us 2% to 4% nonres, 4% to 5% industrials, and resi is flat to 3%. Any of these you feel a little less confident now or a little bit more confident now? And if you can just give us some color, that will be helpful. And this is particularly -- I asked this particularly because your peer Hubbell yesterday took down some of their market outlooks, so.

Yes. No. Great question, Deepa. It's been very consistent. Overall, there's obviously subsegments. We can all redodge of different market segments, apartments or whatever that are continued to be forecasted down. But it's such a small segment for us, less than 10%. It's not really a significant impact. Obviously, things like warehouses and offices and manufacturing [Dodge] and we see strength in 2019 and then also data centers. I don't have specific numbers because we sell, again, through distributors that we sell. But as we are working projects, and David and I are working with our sales team, our general management. We'll be talking, whether it's Facebook or Google and where is the next data center or even when we're out looking at M&A, and they're talking about what they're working on. So those are some of the markets that are pretty active right now. But when you net it all together, since we serve so many markets, that's where we get the confidence in the 2% to 4% overall growth for us.

Okay. Okay. But largely, you're not necessarily changing -- you wouldn't like change any of that outlooks that you gave last quarter, I mean, even though...

No. No, it's the same guide. Yes, even though it's the same 2% to 4%, with -- as the earlier questions, I think it was from Andy and so forth. But hey, we were a little light in the quarter. We knew Q1 was just going to be a tough comp, and we still feel it's at 2% to 4% range.

And Deepa, if you go to our guidance sheet of our presentation, we do show a little bit of a change in our MP&S guidance.

Right. That's why I was asking you...

It's down 2% to 4%. But I think Bill has mentioned earlier that, that's basically timing of projects and where we see that some of these projects take a little bit longer than we first initially thought, perhaps, what we typically see. And we're attributing that to contractor availability and so on and so forth. So that's why we've adjusted that number slightly.

Okay. Okay. So industrials may be slightly lower versus prior but not necessarily because of demand slowdown. It's more like supply constraints that's...

Exactly. Correct.

Your EBITDA outlook, stayed pretty strong, which is great. I mean, you've raised it by $5 million. That seems to be more driven by pricing than volume just given where your Q1 performance stands. But the commentary that you've provided us suggests that you're expecting some volume pickup, too, later on in the year. So -- but within that $5 million raise, is there a way for us to parse out maybe how much, what percent of that was pricing versus volume? Is there anything, any guidelines, hey, 2/3 was pricing, 1/3 was what? Anything, any metrics that we could think about? And especially because we'd assume that pricing is going to moderate from here, your ER, I see double-digit pricing, your MP&S probably has maybe 1 more quarter left. But how do we think about that $5 million raise in EBITDA even after I flow -- I mean, I flowed through some in Q1, but what's volume versus pricing in there?

Deepa, broadly speaking, the increase is due to better pricing. And so we did initially guide that we would have an unfavorable situation year-over-year. We're not saying that, that definitely got better. Volume is just, again, slightly less than our prior guide for MP&S. So if you just kind of net that slightly down volume and MP&S and higher pricing, you get to the $5 million increase in the midpoint of the guide.

Got it. So it's all pricing. Okay. All right. My just housekeeping question, more -- just more a clarification question. So if the tariffs were to go to 25% from here, I mean, is there any impact we should be thinking about? Is it contemplated in the guide at all or no?

I could take that...

I mean, I think if the tariffs move -- I think we've communicated before that the direct tariff impact on our business is very minimal. We do import some products from China, also from India. But by and large, those products are also imported by our competitors. So it's pretty much of a situation where the industry for those products are all imported in some place. We all had the same cost price dynamic. So we really feel that if they went to 25%, the overall impact on our business is very -- pretty minimal.

Yes, I'll just add, though, I apologize, David, [they are on the side, too, picks] up the question. But yes, it's such a small we -- very low single digit of any product we import. It's all -- we are manufacturing here in the states, and we buy steel, copper and so forth. It's a single-digit percent of products we bring in. If anything, using that question, Deepa, is a plug for some -- any sell side, buy side that would be concerned about a company and the volatility of tariffs, we've proven that it's just -- it's not -- if I'd pick my top 2 D subjects, something that I'd lose sleep over.

It's not a key risk.

Yes, it's not a key risk.

(Operator Instructions) There are no further questions at this time. I'd like to turn the floor back to Mr. Waltz for closing comments.

Great. Thank you, Teevan. Before we conclude, let me summarize 4 key takeaways from Atkore's first quarter: first, we delivered and exceeded our earnings; second, we continue to execute well on our key initiatives; third, we are managing price and mix with targeted product categories very well; and fourth, the markets continue to look good for 2019. With these 4 factors in mind, we are confident in delivering upon our commitments and are pleased to increase our guidance for the full year.

With that, I want to thank you for your support and interest in Atkore. I look forward to speaking with you during our next quarterly performance call. This concludes the call for today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.